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Savings versus investments

In my previous post I had mentioned that there’s a difference between savings and investments.

I had a typical middle class up-bringing which laid emphasis on studying hard, becoming an engineer and then getting a good job and working hard. Each year year I used to get an increment. After the first month’s euphoria of the increased salary, the salary always felt less at the end of the month.

Based on my salary I used to try and put away some money into the bank fixed deposit or recurring deposit. But inspite of all the effort at SAVING money I was at the same place financially. I was walking on a treadmill!!!

A few years back rummaging through some old papers I got a receipt of an INVESTMENT of Rs2000 I had made in 1994. That had over the years become close to Rs 100000/-.

That’s when I started analysing, reading books etc. to understand what was it that I was doing wrong. This is what I realised

1. Savings are what you take out from your earnings after you have consumed. You put them in a bank because they are safe but they earn a low level of interest and you PAY TAX on the interest you earn, at the level of income tax.

2. Investment is what you take out of your Savings to help build your CAPITAL. Wealth is only built by making investments. TAX RATES for investments are generally lower, which means you earn more and pay less tax.

This does not mean you should not have FDs….they have a basic advantage of being quick, safe & ready to use when you want it. However you need to decide how much is that emergency cash which you absolutely need and then cart away a certain amount to ensure you build Wealth by making Investments.